The
key to understanding fascism is this: It preserves the despotic
ambitions of socialism while removing its most politically unpopular
elements.
In an atmosphere of fear and loathing, it assures the population that
it can keep its property, religion, and faith — provided all these
elements are channeled into a grand national project under a
charismatic leader of high competence.
—
Jeffrey
A Tucker
In
this issue
Phisix
6750: Update on the Seven Reasons Why the PSEi is Headed South! Why
The Popular Clamor for a Strongman Rule is a Bubble
-Phisix
6,750: Worsening Technical Damage
0Shriveling
Peso Volume and Market Breadth Risk Aversion!
-The
Liquidity Factor: Bond Yield Inversion Spreads
-Headline
Fissures: Manufacturing and Export Recession
-Philippine
GIRs Bolstered by Swaps? Official Labor Market Improves as Online
Jobs Dive!
-External
Influences: Asian Currencies Wilt as China’s Yuan Revalues, Global
Stocks Tank
-External
Influences: Stampede Out of US Junk Bonds Spur Suspension of Client
Redemptions in Two Funds!
-Philippine
Politics: Why the Popular Clamor for a Strongman Rule is a Bubble
Phisix
6750: Update on the Seven Reasons Why the PSEi is Headed South! Why
The Popular Clamor for a Strongman Rule is a Bubble
At
the close of September, I enumerated SEVEN reasons why mainstream’s
wishful thinking of a Santa Claus rally represents a delusion1:
massive technical chart damage, thinning volume unsupportive of bids
at present levels, deterioration in market breadth, shriveling market
liquidity, foundering headlines, flagging Asian currencies and global
stocks under selling pressure.
This
has not been meant to be a gloat but have been intended to provide an
update of the conditions as stated above.
First
some quick numbers. PSEi weekly performance as of December 11th:
Down 2.7%. Year to date: NEGATIVE 6.85%. From April 10’s 8,127.48:
NEGATIVE 17.13%. From the close of September at 6,893.98: Down 2.35%
There
are still about 10 trading days left until the close of the year, so
anything can still happen.
So
let me revert to the 7 premises.
Phisix
6,750: Worsening Technical Damage
First,
Grave Technical Damage.
The
two week pattern of running in circles or a very tight range marked
by strong
opening and weak closing was apparently broken this week.
For
the entire week, the domestic benchmark found itself plodding to
maintain the 6,800-6,900 levels in the face of rapidly thinning
volume. Eventually, the low volume sessions paved way for the buyers
to relinquish to selling pressures.
Interestingly,
not even buoyant US markets of the previous Friday inspired the bids
at the week’s start.
So
with anemic bids, the sellers ruled. With this week’s 2.7% drop,
the PSEi now trades at July 2014 levels! (So much for the three month
short lived raucous ranting and crowing about ‘this time is
different’ pipe dream celebrations especially at the internet
circles)
As
I have been stating here, I am not a fan of charts. But because
charts have served as key guiding instruments for most retail and
institutional accounts then understanding their psychology matters.
Yet
the PSEi chart above points to critical conjunctional foreboding
developments. Or developments that seem to converge to herald a
MASSIVE topping process.
First
of all, trading
range breakdown.
The
three month and two weeks old trading range marked by the 7,285
resistance and the 6,790 support appears to have been encroached upon
for the second time in barely month. The initial test was on November
16 when the PSEi closed at 6,772.92.
Yet
at Friday’s 6,735, the second infringement has considerably been
deeper. And a sustained breakdown of which risks large downside price
movements. The difference between the resistance 7,285 and support
6,790, or 495 points will serve as the next guide for the new
low—6,295!
Second,
what seems as this week’s trading range breakdown, was apparently
highlighted by a
HUGE descending triangle pattern!
Since
April’s 8,127.48, the PSEi has carved out a series of lower highs
while finding its ephemeral base at 6.790 following the August 24
meltdown (see red trend lateral and horizontal trend lines).
Investopedia
notes that a breakdown of descending triangles signifies “a clear
indication that downside momentum
is likely to continue or become stronger”2
Moreover, as clue to depth of the intensifying downside momentum, Investopedia adds that the “most common price targets are generally set to equal the entry price minus the vertical height between the two trendlines.”
So
the difference between 8,127 and 6,790 or 1,337 would account for the
vertical height. Hence, the price target, according to the descending
triangle pattern, would be 6,790 (breakdown price) MINUS 1,337
(vertical height) for the PSEi to crash at 5,453!!!
5,500!
That’s if the pattern will self-fulfill or materialize.
Third,
portentous
HEAD and Shoulders (H&S) patterns plague the headline chart.
I
see two possible H&S formation: a minor (the recent 3 month old)
and a major one (one year and 5 months) as noted by the green curves.
As
bearish indicator, the H&S simply suggests of the failure of
momentum, represented by the right shoulder, to bring about new
heights relative to the previous highs (Head).
And
the breakdown of the neckline or the crucial line that connects the
two recent lows, translates to bearish momentum taking over from the
failed upside dynamic.
And
according to Stockcharts.com3,
“The
slope of the neckline will affect the pattern's degree of
bearishness—a
downward slope is more bearish than an upward slope.”
This
week’s actions have yet to break the necklines marked by the violet
downtrends.
I estimate the neckline of the major H&S at 6,720 and the minor
one at 6,675.
But
the necklines are characterized by downslopes—degree of
bearishness—with the minor neckline having a steeper downslope.
Additionally,
price targets following a break of the H&S neckline, as described
by stockcharts.com, “After breaking neckline support, the projected
price decline is found by measuring the distance from the neckline to
the top of the head. This distance is then subtracted from the
neckline to reach a price target. Any price target should serve as a
rough guide, and other factors should be considered as well.”
Hence,
a breakdown from neckline entails that the two distances (top minus
neckline): 1,407 (major) and 610 (minor) would translate to the
Phisix at 5,383 and 6,180!
The
Phisix major H&S neckline would have already been broken had it
not been for the price fixers or market manipulators, whom pumped
Ayala Land by a stunning 1.6% (lower left column from colfinancial)
during the last minute, to mitigate the headline losses for the day.
With a market share cap of 8.93% (as of December 11), ALI represents
the second biggest PSEi component.
The
ALI ‘marking the close pump’ lifted the Phisix, which was down by
about 101 points or 1.5%, to close by only 1.25% lower (right chart
from Bloomberg). On Friday, ALI closed up 2.6%, which means 61% of
the day’s gains came from ‘marking the close’ actions of price
fixers!
Yes,
price fixers continue to plow on their resources, which are likely
fiduciary money owned by third party entities, to what seems as a
losing cause. Yet
the lower the PSEi, the bigger the losses, the lesser access to new
money for headline manipulations.
Curiously
the ALI marking the close pump came even as stock prices of the
lesser peers suffered a brutal carnage: Robinsons Land (RLC) was
clobbered 4.63% on Friday, crashed by 10.12% for the week, while
Megaworld (MEG) got smoked by 3.23% and tanked by 7.49% over the
week.
And
the irony: RLC suddenly found itself at the portal of the bear market
just after having a new record high at 31.9 just last October 27 or
1 month and 2 weeks after!
All
these suggest that since end of September, the technical picture of
the headline index appears to be worsening.
And
current developments CONFIRM on my warnings during post August 24
meltdown where I noted that crashes have not been isolated events and
would lead to new lows similar
to 20134:
ONE
day panics have not usually signified an isolated incident.
One
day panics are usually followed by another crash, or a string of
crashes or by an eventual weakening or a combination thereof.
Shriveling
Peso Volume and Market Breadth Risk Aversion!
SECOND,
volume
in support of the bids at
present levels continues to substantially attenuate, and
THIRD, despite
the wild pumps on SOME third tier issues, general
market breadth remains tilted towards risk aversion!
As
I have been repeatedly been pounding here, crashes hardly occur
because they are random events, instead crashes
happen because they represent drastic responses to embedded
imbalances in the system.
Those fantastically or ridiculously mispriced assets such as PBVs,
as I showed last week, have signified one of the many symptoms of
deep seated imbalances.
The
reversal of the easy money environment PLUS changes in expectations
brought about by increasing recognition of these factors has helped
reduce risk appetites from which has been revealed through market
actions, aside from prices, through volume, and market breadth.
As
the left chart in the above shows, the average daily Peso volume has
been in a steady decline since the start of the year! Paradoxically,
April’s new record at 8,127.48 came even as Peso volume had been
suffering from chronic erosion!
Peso
volume last Friday has dropped to Php 5.293 billion, the lowest for
the year and a level seen last in January 2014.
Dwindling
volume in the face of this week’s losses means that the bids have
been losing ground in support of prices at previous 6,800-6,900.
And
for current levels to hold, this has to be matched by a material
increase in volume, or else, more downside can be expected.
Market
breadth has also been in a marked deterioration from the start of the
year. The blue rectangle in the right chart above shows that the
advance decline spread provided NO support to April’s new record at
8,127.48. That’s because, except for few instances, the advance
decline spread hardly moved in favor of advancers. Instead, declining
issues dominated BOTH pre-April and post April records.
And
those selective spikes of advancing issues during the post record
have only manifested severely oversold general conditions.
And
further proof of this has been that about
HALF of the issues were in bear markets when the new milestone
had been attained. And because there had been a few participants, the
April record had then been a product
of rotational pumps of 10 of the 15 biggest market cap issues.
In
short, the
April record was a mostly a product of manipulation, thereby a phony
landmark high.
It
was a record designed to achieve headline effects
(even as most of the PSE universe had been in a swoon)! Perhaps this
may have been done to put into spotlight the Philippine president’s
visit to the PSE.
Apparently
market manipulations have become so addictive that such that even
through the current downturn, price fixers continue to with their
chores…unfortunately against their designs.
And
as belatedly discovered, when the PSE hit a new record last April,
the lackluster performance of the broader market essentially
reflected on the contraction
of both PSE’s 2Q NGDP and income!
Such
facts, being politically incorrect, had been censored, purged and
denied out of existence by the PSE and by the mainstream media.
Yes,
the topline performance of the PSE contradicts government data on GDP
(specifically NGDP)!
Yet
last week’s rout only reinforced an existing dynamic.
All
sectors, except the property sector helped by the ALI pump, were in a
FREE FALL.
Yet
the service sector bore the brunt of last week’s losses. And this
was due to the hemorrhaging of Telco companies, PLDT (-7.85%) and GLO
(-9.04%), the port management titan ICT 9-2.57%) and casino BLOOM
(-14.86%)
Among
the 30 composite issues only 4 registered gains this week. That’s
against 26 firms which posted losses. So the 26-4 signifies a
lopsided performance in favor of the sellers.
The
PSE’s spectrum of listed issues also shared the same sentiment.
Losers trounced gainers by a huge margin of 271, the second largest
for the year. All 5 trading days had been dominated by sellers.
So
through the end of September—from chart formations to price actions
to market internals—ongoing developments at the PSE points to
further degradations. That’s unless volume increases in support of
price actions, helped by the broader participation to represent the
return of risk appetite.
The
Liquidity Factor: Bond Yield Inversion Spreads
FOURTH, overall
market liquidity has been shrinking…
Risk
aversion has likewise been reflected on other market activities. The
growing slack in peso volume, predicated on slumping prices, have
also been manifestations of shrinking liquidity. And when sentiment
languishes and expressed through actions, these can be seen on other
market activities such as daily trades and traded issues. Both
factors can be seen as in corrosion.
The
above represents PSE liquidity.
The
more important variable is FINANCIAL liquidity which has underpinned
the G-R-O-W-T-H illusions that has pillared the current asset
bubbles.
ADB’s
favorite indicator the spread of 10yr-2yr has fallen to a mere FOUR
basis points. Or four basis points shy of a critical inverted curve.
More
importantly, stunningly the inverted 10yr-3yr spread has been THREE
weeks old! Why haven’t the manipulators been forcing a widening of
its spreads???
Notice
that this HAS NOT been a HOLIDAY induced phenomenon as some would
like to think. Both spreads have been on a downtrend since November
2014, when I started gathering the data. Though both spreads has
somewhat widened during mid-2015, to peak in July for 10yr-3yr and in
August for 10yr-2yr, both have swiftly relapsed to their current
respective flattening trends. And worst, they are in the process of
inversion!
Such
flattening to inversion process can be extended to the Philippine
Treasury bills!
Both
10yr-6months and 10yr-1 month bills have been narrowing since
November 2014. Apparently interventions which began in April have
forced volatility in the activities of both spreads.
Unfortunately,
those intrusions or manipulations have once again failed to
accomplish a sustained widening. Instead, 10yr-6months spreads have
dropped to its lowest level as indicated on the charts. My impression
is that the spread has reached its lowest level for quite sometime.
In
addition, this week’s 76 bps spike in the yield of 1 month has
compressed spreads with the 10 yr benchmark to similar levels reached
in August, September, October and November.
In
short, none of this represents an anomaly but rather a progressing
dynamic.
I
have been warning on the flattening-inversion dynamic since
late
last
year. I have noted that yield flattening and inversions have
represented
symptoms of the Business Cycle.
As
the Phisix was being pumped on its way to strings of new records, I
wrote last February5,
Loan
portfolios constitute about half or 50% of the banking system’s
assets Php 11.159 trillion as of December based on BSP
data.
This implies that much of the earnings growth from the banking system
has been derived from loans. Thus a slowdown in loan activities will
eventually hurt bank earnings mostly through the loan channel.
Additionally,
financial assets comprise about 20% of the banking system’s balance
sheets. Since values of financial assets have mostly been
a product of
surging credit growth, reduced credit activities postulates to
eventual pressures on the values of financial assets. Once financial
assets reveal signs of strains, ancillary activities related to
financial assets such as commissions or fees will also backtrack.
Thus a slowdown in loan activities will also eventually hurt bank
earnings through the financial assets channel.
And
because of the previous torrid pace of the rate of growth of credit
activities mostly from the banking system, “short-term loans
growing more expensive” should imply a tightening of credit.
And
such tightening extrapolates to likely increases in
the incidences of Non-Performing Loans (NPLs) or expose on the
deterioration of credit conditions in the banking system’s
portfolio. The rise in NPLs will impact banking and financial
system’s balance sheets. And this comes as loan conditions
stagnate. Aggravating such conditions will be a downturn in other
banking and finance activities anchored on sustained inflation of
financial assets.
For
banks, the flattening dynamic should eventually filter into general
earnings conditions.
And
for stocks, a concise way to say this is that a continuing yield
flattening dynamic means that the fuel to the present record stocks
has been draining
fast.
So
a slowdown in credit activities as consequence from a continuing
flattening dynamic will be transmitted to
economic, financial market and credit risk conditions.
Bank
profits have already been underperforming. And this
has already been acknowledged by some in the media.
And
the marginal
pickup in banking loans last October have signified signs of
desperation by the banking sector to generate growth through volume
at the expense of quality. As I remarked last week6,
Remarkably,
with the intensifying compression of net
interest margin,
this means the banking
system must be substituting spreads for volume.
If
BSP statistics have been accurate, then this means that the banking
system has been immensely lowering or sacrificing its
credit standards to issue more debt to offset the ongoing
retrenchment in spreads. So the
banking system must be so desperate as to seek margins by gambling
away depositor and equity holder’s resources through the
assimilation of more credit risks by lending to entities with poor or
subprime credit ratings.
As
for the lagged effect of the yield curve on stocks and earnings, they
have apparently surfaced. This is why the Phisix has been off 17%
from its April peak, has been down -6.85% year to date, and why 2Q
PSE NGDP have slumped.
Current
developments or the recent abrupt path towards inversions hardly
provide comfort for any meaningful recovery. To the contrary since
this has fundamentally been about balance sheets conditions, current
developments presage on the escalation of current conditions.
The
proverbial chicken has come home to roost.
Eventually,
the effects of the yield curve will become too powerful enough for
the Philippine government to be able to conceal through statistical
prestidigitations.
Headline
Fissures: Manufacturing and Export Recession
The
FIFTH
factor, receding
liquidity entails that the headlines will unlikely be supportive of a
major upside move
Remember
how some mainstream experts try to put up a silver lining or a
positive spin on the manufacturing data? I wrote7,
So
they cherry pick on statistics that makes GDP to supposedly look
good. Say manufacturing, despite a negative August data, they will
instead cite ‘volume’ which grew by 3.7%. It’s really
disconcerting, if not pathetic, to see people brandish numbers even
when official GDP computation of manufacturing
is about Gross Value Added or the
measure of value of goods and services of
a sector in the economy. And yet they call themselves experts.
Apparently, experts at manipulating numbers.
To
add, given the CONTRACTION in bank credit or loans to the
manufacturing sector, I guessed that manufacturing output would be
worse than expected?8
September’s
credit collapse seems as harbinger of an even deeper downturn on the
activities (hiring and output) and prices of the said sector.
Well,
I have been lucky! I made the right call!
From
the PSA on value of production9:
(bold added) Value of Production Index (VaPI) for total manufacturing
went down as it posted a decrement of 9.2 percent in October 2015
compared with a year ago growth of 8.0 percent, according to the
preliminary results of the Monthly Integrated Survey of Selected
Industries (MISSI). The decreases
in 11 major sectors pulled down the VaPI.
Five major sectors exhibiting two-digit decreases in VaPI were noted
in the following: petroleum products (-35.2%), furniture and fixtures
(-30.5%), wood and wood products (-29.4%), food manufacturing
(-15.6%) and beverages (-13.2%). (see top and bottom left chart)
Based
on volume of production, the PSA makes a rather bizarre report:
Volume of Production Index (VoPI) made a turnaround as it posted a
minimal annual decline of 1.8 percent in October 2015 from an
increase of 8.7 percent during the same month last year. This was
mainly influenced by the decrements
noted in eight major sectors, offsetting
the increases reported by 12 major sectors. Four major sectors that
registered two-digit decreases in VoPI were as follows: petroleum
products (-20.3%), beverages (-19.7%), food manufacturing (-15.7%)
and wood and wood products
The
top and bottom charts of value of production shows of the magnitude
of the decline: at -9.2% October’s data was a collapse!
It
was the largest
decline for the year. Also it had been the biggest
decline since 2013, 2011 and 2009 (lower right charts).
Sectors
that posted declines were a lot larger than those that those that
posted increases.
But
October’s manufacturing collapse had a different story than the
previous years. 2009 represented a dramatic reaction to global
developments. 2011’s decline was an offshoot to the upsurge in
manufacturing growth in 2010 which was concomitant with the BSP’s
policy shift in 2009. 2013 appeared to be an anomaly. While 2015 has
signified a DOWNTREND since last quarter 2014 (a consequence of 10
consecutive months of 30++% money supply growth)
Since
manufacturing has been down for 7 straight months or more than two
quarters then this should signify already a manufacturing recession.
Not
even industrial volume was exempted. Industrial volume had been
previously been used by the mainstream to spin G-R-O-W-T-H. Current
data has locked out on this option.
However,
what’s bizarre has been the PSA’s claim of a “turnaround”
when data tells us otherwise. Volume decline has been as large as
February 2015!
Moreover,
look at the net sales in terms of value and volume (top right). Both
have been down by MOST since September 2014!
Now
let us move on to exports.
The
same government agency tells the public that export growth contracted
by 10.8% last October on a broad based decline: The Philippines’
export sales totaled
$4.590 billion in October 2015, a 10.8 percent decrease from
$5.148 billion recorded value in October of 2014. The negative
growth was mainly brought
about by the decreases in seven major commodities out of the top ten
commodities for the month.
These include articles of apparel and clothing accessories (-53.6%),
other mineral products (-50.2%), chemicals (-40.3%), metal
components (-35.9%), coconut oil
(-31.2%), other manufactures (-30.0%),
and machinery & transport equipment (-18.0%).
On
the other hand, merchandise exports for the
ten-month period of 2015 registered a 6.2
percent drop,
that is from $52.124 billion in 2014 to $48.871 billion in same
period of 2015.10
It’s
the second consecutive month for a 10%+ decline. It’s the third
month for the year that scored 10% growth deficits. October’s
contraction represents the seventh straight month of losses, and 10
months of negative growth over an 11 month period.
From
a nominal basis, exports sit at a critical juncture (see right from
tradingeconomics.com)
which seems vulnerable to a breakdown.
Moreover,
note that the losses incurred had not only been by the broader
industry but that the losses have been substantial in degree.
Importantly,
ALL major export markets posted negative growth: Japan -7.7% (22.6%
share), USA -13.1% (14.7% share), Hong Kong -4.3% (10.8%), China
31.6%!! (9.3%) and Singapore -8.9% (7.4%)
So
along with manufacturing, given the string of months with negative
growth, the export industry has likewise been in a recession.
Oh
but don’t worry, as 3Q GDP has shown, what
have been reported as NEGATIVE can in fact be magically transformed
through statistical alchemy of price deflators to G-R-O-W-T-H!
Philippine
GIRs Bolstered by Swaps? Official Labor Market Improves as Online
Jobs Dive!
And
with the exports in deep red, while growth in OFW remittances in
seeming stagnation, it has been a wonder where the BSP gets support
for its GIRs.
The
BSP reported that November
GIRs have been down by a marginal US $.53 billion to US $80.57
billion.
Yet
ironically BSP forex holdings have skyrocketed almost alongside the
USD-Php (see bottom pane). Forex holdings have surged 496% year on
year and 451% from April as the USD Php recoiled upwards.
Could
it be that the BSP have mimicked China’s
use of the swap markets to borrow dollars and sell these to the
spot markets, backed by forward contracts to hedge such positions to
keep a status quo or a façade on the GIRs?
Yet
if true, then eventually those borrowed dollars will have to be
repaid.
So
time will tell if government’s GIR has been another hall of
mirrors.
Finally,
latest government data indicates that NGDP for manufacturing and
exports have been in recession.
Meanwhile,
OFWs have been relegated by government statisticians to benchwarmers
since remittances have now become insignificant to consumer spending.
Well that’s
the way the government has presented 3Q GDP.
In
short, three major economic forces have been rendered as being of
less importance to the statistical economy.
Such
omission can partly be seen in the recent jobs data.
The
government announced that unemployment
has fallen to 5.6% last October from 6% a year ago (see left
upper window).
On
the other hand, employment rate improved by 94.3% (excluding Leyte)
from 94% a year ago.
The
distribution of jobs
per industry: 29.6% agriculture, 15.9% industry and 54.5%
industry
So
what current government data implies has been that any weakness in
the manufacturing sector and stagnation in agriculture have been MORE
than offset by G-R-O-W-T-H from the service sector.
At
the same time, this G-R-O-W-T-H from the service sector has emerged
with little contribution from OFWs.
You
see the government makes many assumptions that appear unsupported by
real accounts. They look very much statistical artifacts.
Additionally,
the supposed G-R-O-W-T-H in jobs runs in contradiction to job opening
numbers as indicated at the three online websites
The
job numbers have hardly recovered from their recent losses.
For
instance, Monster.com’s September
employment index recorded an almost halving (-16%) of the losses
from August’s (-31%). (see upper right window) It’s still a loss
but substantially lesser loss than the previous month.
An
online job website, which used to be owned by a major publicly listed
holding company, similarly reflected the same September bounce.
Unfortunately, the rebound seemed momentary, as the weekly numbers
went into a tailspin! From September through last week, job openings
have dived!
A
third online jobs website also recorded sharp declines in job
openings. From April 21st job openings have crashed by a shocking
79%!
Perhaps
employers have resorted to the traditional medium of newspaper based
advertisement, which should be more costly, and more inefficient in
drawing audiences or candidate employees.
Or
perhaps employers have resorted to direct hiring via viral
networking, without media advertisements.
Or
perhaps job openings have really been dwindling.
Nonetheless
based on online job openings the government’s statistical numbers
have been unsubstantiated.
I
would like to construct a Beveridge
curve (statistical representation which compares unemployment
relative to job vacancy rate). However, if one starts with wrong
assumption and false data set, one gets a flawed diagnosis or a
distorted picture of reality.
Government’s
job report seems like another case of down is UP, low is HIGH, less
is MORE.
As
one would note, headlines have become more about propping up of
statistical numbers which is a sign of desperation.
Yet
in spite of the headline embellishments, some real events as
manufacturing and exports have become too obvious to ensconce.
External
Influences: Asian Currencies Wilt as China’s Yuan Revalues, Global
Stocks Tank
And
it is not just internal developments, external dynamics will have
influence too. This represents my sixth and final reasons why markets
are likely headed lower.
As
previously noted…SIXTH, a
significant domestic stock market rally will unlikely occur if Asian
currencies continue to get clobbered…and
SEVENTH, a
significant domestic stock market rally will unlikely occur if global
stocks will remain under selling pressure.
The
USD Php officially closed the week up .26% to Php 47.235 from last
Friday’s Php 47.105
Intriguingly,
the pesos’ losses came as the Chinese yuan fell by
.83% last week (or the USD
CNY increased by .85%). Currencies of East Asian economies fell
considerably this week (right chart).
Based
on unofficial rates, the peso closed at 47.31 (Bloomberg). Yahoo and
google finance sees the USD peso trading at Php 47.43 at the start of
the week. So if the USD will hold on its gains through the day’s
end, then the USD-php will break resistance levels by next week.
Chinese
exports fell 6.8% in November to record its fifth straight
monthly annual decline. Export growth has been negative in 8 out of
the last nine months. Meanwhile November
imports fell 8.7% year on year to post 13 straight months of
annual contraction.
Importantly,
the Chinese government’s foreign
exchange reserves plummeted by $87.2 billion in November to $3.44
trillion! November GIRs have dropped to February 2013 lows where this
year’s reduction has accrued to $405 billion according to
Bloomberg.
The
weakening yuan has hardly been about promoting exports which should
signify a subsidiary objective. Instead, depreciation of the yuan has
mainly been a manifestation of the Chinese government’s soft peg
currency policy which has come under pressure from her economy’s
imploding internal bubbles.
And
a symptom of popping bubbles has been the intensification of capital
flight.
As
I noted during the August revaluation11.
Defending
the US dollar soft peg required access to US dollars. Unfortunately,
such window has been closing for the Chinese economy. Moreover,
outflows and or capital flight have been compounding on the supply
conditions of an already scarce US dollar. Finally, domestic
credit expansion to save the stock markets translates to relatively
more money supply vis-a- vis the US dollar (whether the Fed tightens
or keeps policies at current levels). This implies supply side
influences on the yuan’s weakness.
Hence,
inflationism PLUS the scarcity of US dollar supply reveals why the US
CNY soft peg cannot be sustained.
Acting like a relief valve, China’s
central bank, the PBOC, simply relented on the building pressures on
the peg. The PBoC responded by allowing the markets to partially
revalue the yuan. Hence the devaluation!
Yet
the current surge of missing
business executives, which this week has included China’s
version of ‘Warren Buffett’ Guo
Guangchang, the billionaire chairman of Fosun International Ltd., as
part of intensifying political repression campaign will likely
compound on capital flight woes.
And
it may not just be about capital flight but likewise, imploding
bubbles should translate to money supply destruction. And this can be
seen through the slack in money
supply (M2) growth, slumping growth of CPI
and deepening deflation in manufacturing input prices or the PPI
Importantly,
considering China’s
immense US dollar debt exposure, borrowing to pay back debt will
only reduce US dollar supply. How much more when highly leverage
companies default?
And
this compounds on the US dollar dilemma which has now become a global
phenomenon.
So
while the USD CNY’s advance may not have been as steep as last
August, the USD-CNY broke out from its allotted bandwidth.
The
last time the USD-CNY materially advanced (again last August), the
USD Php spiked, and global financial markets tremored.
To
recall, two weeks after the USD CNY revaluation, the Phisix suffered
a meltdown on August 24th.
And
it is probably more than a coincidence to see yuan’s decline
juxtaposed with a nosedive in major equity benchmarks of the world as
oil prices plumb
to 7 year lows!
So
it will be interesting to know if the USD-CNY will continue to
ascend. And at what pace will this be?
And
if so, will history repeat?
External
Influences: Stampede Out of US Junk Bonds Spur Suspension of Client
Redemptions in Two Funds!
And
another thing, the US Federal Open Market Committee (FOMC) will be
holding its meeting next week (December 15-16), with markets heavily
anticipating its first
rate hike since June 2006.
This
comes even as financial markets have shown increased signs of
anxieties anew.
In
the US, its more than just falling stocks but yields of junk bonds
have been rocketing!
And
more than that, spiking yields have been accompanied by a stampede
towards the exit doors!
Junk
bonds reported $3.8 billion in outflows, the largest in 15 weeks
according to Marketwatch.
And with a surge in defaults and downgrades, liquidity has dried up
as junk bond returns have turned negative
And
the surge in outflows has prompted mutual fund Third
Avenue Management to halt investor redemptions this week! Third
Avenue Management has quickly been followed by distressed debt hedge
fund Stone
Lion Capital Partners LP which likewise announced a suspension of
client redemptions. Such deferment of client redemptions marks the
first since 2008! It’s a creepy deja vu to know that Stone
Lion’s founders are veterans of the defunct Bear Stearns!
As
one would note, whether external or internal, there have hardly been
any factors supportive for a yearend rally. And perhaps if current
conditions prevail OR even worsen, then there will hardly be any New
Year’s celebration either.
Philippine
Politics: Why the Popular Clamor for a Strongman Rule is a Bubble
As
I have been saying here, everything is connected.
This
applies to even to politics.
Apparently
bubble behavior in the markets and in the economy has spread to
contaminate populist politics.
Financial
Bubbles which are the belief in something out of nothing, can traced
to have spilled over to the du
jour
politics in the form of the strongman rule.
The
strongman rule bubble evinces of the desire to solve social economic
and political problems with the arbitrary use of force.
The
strongman rule bubble believes that such arbitrary use of force will
serve to benefit the populace.
The
strongman rule bubble believes such arbitrary use of force will be
applied platonically on perceived popular moral grounds.
The
strongman rule bubble believes in the oxymoron that the democracy, a
government by the people, is inferior to and should be substituted
for a reign of absolute power—dictatorship. Essentially people who
adore the strongman rule bubble have really been against democracy.
Not only have they have been incoherent, they must be petty tyrants.
The
strongman rule bubble believes everyone has to conform with
strongman’s values, preferences, tastes, perception and priorities.
The
strongman rule bubble believes that rule of law will have to give way
to the rule of men.
Said
differently, the strongman rule bubble represents a fixation toward
short term elixirs at the cost of the long term. See? Something for
nothing.
This
fantastic graphic from the creative genius Jessica
Hagy shows us why the strongman rule is a bubble (see left).
It
says that when the problem is ignored we get vastly reduced
probability of a salutary outcome.
How?
For
one, the strong man bubble depends on a leader, which for Lord Acton
(John Dalberg-Acton, 1st Baron Acton) will be corrupted by power or
“Absolute
Power Corrupts Absolutely”.
Another,
dictatorship depends on leaders whom are unfettered by social
compulsion such that the great FA Hayek says that the “Worst Get on
Top”.
Such
totalitarian leaders will take on the task that are “ruthless ready
to disregard the barriers of accepted morals can execute”12.
Such task essentially attracts sociopaths, sadists and morally
insensitive people.
Third,
Eugen Richter a German politician saw totalitarians as “born bad”.
Why? Economist, author and Professor Bryan Caplan explain13:
Richter:
they are idealists, but their ideal is totalitarian. Deluded zealots
who sincerely believe in their cause but their cause from the outset
is one that involves doing terrible things to people. Consistent with
Lenin, Castro, people who you could have believed and many did
believe were idealists and altruists, but they were quick to destroy
and kill. Very often people assume that if you are not corrupt, then
you are good. So Stalin, for example, by all accounts lived an
extremely modest life, slept on a cot; but he murdered millions of
people.
In
a modern dictatorship where you have to fight to get to the top,
those who get to the top have to kill; whereas in a hereditary
monarchy, you actually do eventually have a chance of getting lucky.
King Leopold situation: one dividing line people make between
sociopaths and simple murderers is that sociopath doesn't mind doing
horrible things to people who are well known to him. Stalin a
sociopath in this sense; Hitler really was not. Stalin enjoyed
putting the wives of people he worked with in prison. Hitler, while
he was willing to do things to millions of strangers, with people he
knew, he really had to work himself up. The decision made to kill
Ernst Roehm, he spent several hours trying to convince himself it
would be all right. Probably similar for King Leopold--easier to kill
people far away.
In
short, dictatorship depends on leaders who are largely malignant
narcissist, who would not hesitate to “kill,
murder, hurt anyone who gets into their way”—to please their
egos.
So
throughout history, the strongman rule has undermined rather than
promoted society’s welfare. Millions
have needlessly died out of the whimsical desire to impose an
arbitrary totalitarian rule on their constituents.
And
this is why it is a bubble. It
serves as misperception or confuses reality with fantasies. It sees
politics as a superhero type of saving the damsels in distress.
Fourth,
the strongman rule bubble believes that politics is superior to
economics. So by curtailing economic activities which will either be
substituted by government ownership of the factors of production
(socialism) or by private ownership of the same factors but at the
command of the state or state directed (economic fascism), the strong
man rule bubble will entail of the shrinkage of the real economy.
Hence, real economic activities will be substituted for political
debt and inflation.
The
last strongman rule was essentially designed as a transfer of
economic power from domestic oligarchs to the strongman and his
cronies, according to the US government communication as revealed by
WikiLeaks.
Such
Philippine strongman rule caused the meltdown of the peso (USD Php
soared 660% over 21 years). The strongman rule essentially laid the
seeds for the exports of residents or a diaspora which now have been
hailed as “heroes”
So
a strongman rule should mean a collapse of the peso.
Politics
signifies a theater of the absurd.
So
it’s not even clear if the strongman rule has merely been a
marketing ploy to get elected or if candidate/s pandering to the
strongman rule crowd have really been a double entry (or diversion)
to stealthily favor for another candidate.
You
see, the strongman rule, which advocates expanded use of violence to
facilitate a unilateral transfer of power, would likely be met with
vehement, if not violent, resistance by entrenched vested interest
groups whose powers or privileges will likely be at risk, even prior
to the elections.
So
violence may beget violence. In the Middle East, violence as solution
to spread democracy got a response: a Blowback, the surge of
terrorism.
Or
politics represents just a comedy of errors.
It’s
December. So I would suggest relevant contemporary movies on the
strongman rule bubble: The
Hunger Games—Mocking Jay Series and the Star
Wars Saga.
_____
1
See
Phisix
6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A
Delusion; Manipulators Lose Significance September 27, 2015
2
Investopedia.com
Descending
Triangle
3
Stockcharts.com
Head
and Shoulders Top (Reversal)
4
See
Phisix
7,100: 2Q GDP Hype, One Day Crashes Have Hardly Been Isolated
Events, August
31, 2015
5
See
Clash
of the Titans: Phisix 7,700 in the Face of a Steep Flattening of the
Bond Yield Curve! February 15, 2015
6
see
Phisix
6,900: Smoking Gun Evidence: PSE Listed Firm’s 2Q NGDP Drops By
3%, as Income Dives 7.5%! December 6, 2015
7
see
Phisix
7,100: Surprise! ICTSI Chief Enrique Razon Warns: Another Financial
Crisis is COMING!!!! SM Plays with Fire! November 9, 2015
8
See
Phisix
7,150: Bank Lending to the Manufacturing Sector Shrinks!
Manufacturing in Recession? November 2, 2015
9
Philippine
Statistics Authority, Monthly
Integrated Survey of Selected Industries : October 2015 December
10, 2015
10
Philippine
Statistics Authority Merchandise
Export Performance : October 2015 December 10, 2015
11
See
Phisix
7,400: Deteriorating Headlines and Market Internals, China Devalued
In Response To Deflating Bubbles August 16, 2015
12
Friedrich
von Hayek, The
Road to Serfdom: Text and Documents: The Definitive Edition p
159
13
Bryan
Caplan Econotalk Caplan
on Hayek, Richter, and Socialism Russ Russell Econotalk June 28
2010
